-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MuKHvWEGY78KRRR9Wf4z5BdVwBFIGV60F291+yC6Z952I+UB2r/vyyyqrO2U0rTv bNo6nAoSwWmlE/o/u89BLg== 0000935069-07-002449.txt : 20071023 0000935069-07-002449.hdr.sgml : 20071023 20071023131042 ACCESSION NUMBER: 0000935069-07-002449 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20070831 FILED AS OF DATE: 20071023 DATE AS OF CHANGE: 20071023 EFFECTIVENESS DATE: 20071023 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Flaherty & Crumrine PREFERRED INCOME OPPORTUNITY FUND INC CENTRAL INDEX KEY: 0000882071 IRS NUMBER: 954355600 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06495 FILM NUMBER: 071185177 BUSINESS ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: (626) 795-7300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: PREFERRED INCOME OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19920929 N-30B-2 1 q41921_fpon30b.txt FLAHERTY & CRUMRINE PREFERRED INCOME OPP 8-07 FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund ("PFO"): Beginning with issues arising in the subprime mortgage loan market, a well-publicized series of events has roiled financial markets over the past several months. The preferred stock market and closed-end funds have been particularly impacted, and, consequently, for the Fund's third fiscal quarter ended August 31, 2007, the Fund had a total return of -5.5% on the net asset value (NAV) of its Common Stock. As we've discussed in prior letters, problems in the subprime mortgage loan market first bubbled up in January of this year. Throughout this year, the Fund has had no direct exposure to subprime loans, and we avoided investing in companies that had meaningful risks associated with the product. Our research team closely monitors the loan quality and underwriting standards of each financial company in the portfolio, and we invest only in companies that meet our quality thresholds. We're not perfect, but we believe that the Fund's portfolio is comprised of holdings in fundamentally sound companies. In isolation, the impact of this weakness in the subprime loan market should have been limited to direct participants in this market; unfortunately, given the complexity of the financial system, few things happen in isolation. When the subprime problems became more pronounced several months ago, the fallout from this subprime weakness has been widespread and severe. Fueled by low interest rates and relatively relaxed financing terms, a great deal more leverage had become built into the system than even just a few years ago. As investments directly associated with subprime mortgages declined significantly in value during the quarter, they became very illiquid. Highly-leveraged investors then were forced to sell other more liquid types of assets like investment-grade preferred and debt securities to meet redemptions or margin calls. Risk and liquidity premiums surged, indiscriminately taking yields on all credit instruments with them. In short, excess leverage created the financial powder keg and subprime loan problems provided the spark. With yields on preferred securities rising more than yields on more senior debt securities, the prices of the securities in our portfolio fell as the supply of preferred securities exceeded demand. The rearview mirror is still a bit foggy, but it appears that much of the selling pressure came from hedge funds. Hedge funds had become the 800-pound gorilla in the credit markets recently, and although they've been forced to slim down, they can still have a big impact. Hedge funds were not the only investors selling, but since they aren't required to disclose their preferred securities holdings, no one knows how extensive their selling pressure was. As a result, prospective buyers were extremely cautious because they feared additional selling would further depress prices. Wall Street brokers and dealers normally stand ready to provide liquidity to sellers, but they appeared reluctant to buy. Long-term investors like the Fund, as well as individual investors, insurance companies and pension funds, also stayed on the sidelines for the most part. During the quarter, and since it ended, we have added some positions at attractive levels, but we are continuing to take a go-slow approach. Subprime fallout also extended to the market for short-term, or money-market, securities such as commercial paper and auction-rate securities. This market was in a state of disarray throughout August and into early September. Investors in money-market securities don't like risk, and, at the slightest hint of trouble, they pull their money out and invest in short-term government securities. While the perception of risk is real for a small segment of borrowers, the reaction seems to be disproportionate. These disruptions in the short-term market impacted the Fund in two meaningful ways. First, they contributed to price weakness in many of the Fund's investments, particularly in financial companies. While banks can fulfill their short-term financing needs with customer deposits and through the Federal Reserve, finance companies like broker-dealers need to rely on the short-term securities market to run their day-to-day operations. This market is like oxygen to most financial companies, and restricting their borrowing makes it more expensive for them to operate. We continue to believe that none of the financial companies in our portfolio face significant risks of default as a result of this increased cost of borrowing, but it has clearly impacted their earnings outlooks and the prices of their preferred securities. Second, the rates paid by the Fund on its own auction-rate Preferred Stock have risen significantly as a direct result of liquidity problems in the financial markets. The frustrating irony is that the Fund's own Preferred Stock is of very high quality with a rating of AA and logic would dictate that rates should fall as investors seek out higher quality investments. This high quality is a function of the Investment Company Act (which governs the Fund) and the guidelines imposed by the rating agencies. As Kevin Conery, Merrill Lynch's Preferred Stock Strategist, recently observed about the Investment Company Act, "while some have criticized it for being too conservative for its 200% asset coverage test, at times like these in the market, we respect this discipline." While we are beginning to see some improvement in the auction rates of our Preferred Stock, and the recent interest rate cut by the Federal Reserve should help over the coming months, we haven't yet returned to more normalized auction rates. The higher cost of our auction-rate Preferred Stock comes directly out of money available for distribution as the monthly Common Stock dividend. On the plus side, higher yields on preferred stock mean that we have been able to increase the income earned on the portfolio. It will take some time to see how these two offsetting factors affect income; in the meantime we are doing our best to manage both. Effective with the August dividend, we raised the dividend by 5% and we continue to be comfortable with that increased dividend payment; nonetheless, we strive to pay out a rate that is sustainable and will make adjustments as conditions warrant. We have been through periods of fear and volatility before, and we remain optimistic about long-term prospects for the Fund. Such periods create opportunities to buy securities of sound companies at discounted prices, as many shorter-term investors exit the market by selling both good and bad investments. We expect both more rational pricing and reduced risk of early redemption of our portfolio securities as markets settle down - both of which should benefit future returns for long-term investors. In addition, our Preferred Stock auction rates are likely to normalize in due course, as the market begins to better recognize the credit quality of our Preferred Stock. While we cannot say with certainty when, or if, these things will happen, as managers we are doing our best to position the Fund to ride out the current storm and prepare for better days ahead. In volatile market conditions like these, we may provide more frequent updates about the preferred securities market and the Fund's portfolio. We did so this past quarter by adding special Questions and Answers regarding the market price of the Fund's shares to the Fund's website at WWW.PREFERREDINCOME.COM. We encourage you to stay informed as shareholders by periodically visiting the website for additional information about your Fund. Sincerely, /s/ Donald F. Crumrine /s/ Robert M. Ettinger Donald F. Crumrine Robert M. Ettinger Chairman of the Board President October 17, 2007 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OVERVIEW AUGUST 31, 2007 (UNAUDITED) ------------------------------------------------------------------ FUND STATISTICS ON 08/31/07 - -------------------------------------------------------------------------------- Net Asset Value $ 11.24 Market Price $ 11.00 Discount 2.14% Yield on Market Price 7.42% Common Stock Shares Outstanding 11,736,346 MOODY'S RATINGS % OF PORTFOLIO - -------------------------------------------------------------------------------- AA 3.5% A 14.1% BBB 57.2% BB 14.3% Not Rated 8.7% - -------------------------------------------------------------------------------- Below Investment Grade* 16.3% * BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P. [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] INDUSTRY CATEGORIES % OF PORTFOLIO - -------------------------------------------------------------------------------- Utilities 34% Banking 24% Insurance 16% Financial Services 12% Energy 8% REITs 3% Other 3% TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO - -------------------------------------------------------------------------------- Interstate Power & Light 5.1% Liberty Mutual Group 4.1% Xcel Energy 3.7% First Republic Bank 3.3% EOG Resources 3.2% Public Storage 3.2% CoBank ACB 3.1% Banco Santander 3.0% Goldman Sachs 2.9% HSBC Plc 2.6% % OF PORTFOLIO** - -------------------------------------------------------------------------------- Holdings Generating Qualified Dividend Income (QDI) for Individuals 61% Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 53% - -------------------------------------------------------------------------------- ** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION. 3 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS AUGUST 31, 2007 (UNAUDITED) - ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- 93.0% BANKING -- 23.9% - ------------------------------------------------------------------------------------------------------------------------------------ $ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .......................................... $ 3,392,376 Banco Santander: 17,000 Adj. Rate Pfd., 144A**** ................................................................ 388,960**(1) 195,600 6.50% Pfd., 144A**** .................................................................... 4,389,264**(1) 56,800 6.80% Pfd., 144A**** .................................................................... 1,322,872**(1) $ 1,900,000 Capital One Capital III, 7.686% 08/15/36 ................................................... 1,764,007 $ 3,000,000 CBG Florida REIT Corporation, 7.114%, 144A**** ............................................. 2,922,033 19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 .............................................. 484,447 Cobank, ACB: 45,000 7.00% Pfd., 144A**** .................................................................... 2,311,200* 75,000 7.814% Pfd., 144A**** ................................................................... 4,018,500* $ 1,250,000 Comercia Capital Trust II, 6.576%, 02/30/37 ................................................ 1,109,492 4,500 FBOP Corporation, Adj. Rate Pfd., 144A**** ................................................. 4,606,875* $ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ........................................ 2,348,077(1) First Republic Bank: 200,000 6.25% Pfd. .............................................................................. 4,962,500* 5,000 6.70% Pfd. .............................................................................. 123,750* 890 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........................ 996,640 22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ............ 577,350 5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 .............................................. 126,094 5,000 HSBC Series II, Variable Inverse Pfd., Pvt. ................................................ 5,055,000* 2,500 HSBC USA, Inc., $2.8575 Pfd. ............................................................... 122,734* 7,000 ING Groep NV, 7.05% Pfd. ................................................................... 173,547**(1) 12,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 .................................................. 297,750 45,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 .................................................... 1,054,688 28,000 PFGI Capital Corporation, 7.75% Pfd. ....................................................... 716,800 $ 250,000 Regions Financing Trust II, 6.625%, 05/15/47 ............................................... 230,922 10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** ......................................... 1,068,658 70,500 Sovereign Bancorp, 7.30% Pfd., Series C .................................................... 1,883,231* 20,375 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ............................................. 518,927 U.S. Bancorp, Auction Pass-Through Trust, Cl. B: 9 Series 2006-5, Variable Rate Pfd., 144A**** ............................................. 202,500* 9 Series 2006-6, Variable Rate Pfd., 144A**** ............................................. 202,500* $ 900,000 Webster Capital Trust IV, 7.65% 06/15/37 ................................................... 889,636 - ------------------------------------------------------------------------------------------------------------------------------ 48,261,330 ---------------
4 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- (CONTINUED) FINANCIAL SERVICES -- 11.2% - ------------------------------------------------------------------------------------------------------------------------------------ CIT Group, Inc.: $ 3,550,000 6.10% ................................................................................... $ 2,618,661 60,000 6.35% Pfd., Series A .................................................................... 1,311,750* 160,000 Countrywide Capital IV, 6.75% Pfd. ......................................................... 2,978,000(2) 12,000 Countrywide Capital V, 7.00% Pfd., 11/01/36 ................................................ 222,150 Goldman Sachs: 11,000 Adj. Rate Pfd., Series A ................................................................ 264,000* 36,500 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 .......................................... 821,706 25 Pass-Through Certificates, Class B, 144A**** ............................................ 2,005,000* 3,500 STRIPES Custodial Receipts, Pvt. ........................................................ 2,838,500* Merrill Lynch: 83,000 Adj. Rate Pfd., Series 5 ................................................................ 1,859,723* 29,000 Adj. Rate Pfd., Series H ................................................................ 667,000* 3,000 Series II STRIPES Custodial Receipts, Pvt. .............................................. 2,298,000* SLM Corporation: 94,150 6.97% Pfd., Series A .................................................................... 4,366,677* 4,000 Adj. Rate Pfd., Series B ................................................................ 308,000* - ------------------------------------------------------------------------------------------------------------------------------ 22,559,167 --------------- INSURANCE -- 13.6% - ------------------------------------------------------------------------------------------------------------------------------------ 48,800 ACE Ltd., 7.80% Pfd., Series C ............................................................. 1,236,714**(1) $ 4,250,000 AON Capital Trust A, 8.205% 01/01/27 ....................................................... 4,501,264 Arch Capital Group Ltd.: 10,000 7.875% Pfd., Series B ................................................................... 245,000**(1) 24,400 8.00% Pfd., Series A .................................................................... 607,714**(1) $ 2,500,000 AXA SA, 6.463%, 144A**** ................................................................... 2,266,300**(1) Axis Capital Holdings: 12,100 7.25% Pfd., Series A .................................................................... 288,736**(1) 24,700 7.50% Pfd., Series B .................................................................... 2,472,470(1) 22,300 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ......................................... 524,329 75,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ............................................... 1,802,250 5,750 Everest Re Capital Trust II, 6.20% Pfd., Series B .......................................... 128,872 $ 935,000 Everest Re Holdings, 6.60%, 05/15/37 ....................................................... 872,307 $ 4,500,000 Liberty Mutual Group, 7.80% 03/15/37, 144A**** ............................................. 4,022,919 29,350 MetLife, Inc., Adj. Rate Pfd., Series A .................................................... 726,779* $ 511,000 Provident Financing Trust I, 7.405% 03/15/38 ............................................... 495,453 Renaissancere Holdings Ltd.: 27,950 6.08% Pfd., Series C .................................................................... 586,391**(1) 79,100 6.60% Pfd., Series D .................................................................... 1,748,110**(1)
5 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) - ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- (CONTINUED) INSURANCE -- (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ 115,500 Scottish Re Group Ltd., 7.25% Pfd. ......................................................... $ 2,014,031**(1) $ 1,060,000 USF&G Capital, 8.312% 07/01/46, 144A**** ................................................... 1,263,944 $ 1,888,000 XL Capital Ltd., 6.50%, Series E ........................................................... 1,669,485(1) - ------------------------------------------------------------------------------------------------------------------------------ 27,473,068 --------------- UTILITIES -- 32.6% - ------------------------------------------------------------------------------------------------------------------------------------ Alabama Power Company: 4,980 4.60% Pfd. .............................................................................. 415,282* 6,485 4.72% Pfd. .............................................................................. 554,857* 868 4.92% Pfd. .............................................................................. 77,417* 6,579 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 .................................. 682,366* 74,270 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ........................................... 3,554,562 1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt. ...................... 130,224* 3,798 Central Maine Power Company, 4.75% Pfd. .................................................... 316,069* 8,339 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. .................. 867,089* Connecticut Light & Power Company: 2,050 4.50% Pfd., Series 1956 ................................................................. 81,877* 10,000 4.50% Pfd., Series 1963, Pvt. ........................................................... 397,400* 25,000 5.28% Pfd., Series 1967 ................................................................. 1,177,000* 883 $2.04 Pfd., Series 1949 ................................................................. 31,965* 2,900 $2.20 Pfd., Series 1949 ................................................................. 113,245* 9,652 $3.24 Pfd. .............................................................................. 505,958* 2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C .............................. 172,520* 7,500 Dayton Power and Light Company, 3.90% Pfd., Series C ....................................... 502,800* 15,030 Duquesne Light Company, 3.75% Pfd. ......................................................... 493,886* Entergy Arkansas, Inc.: 2,840 4.56% Pfd. .............................................................................. 232,198* 3,050 4.56% Pfd., Series 1965 ................................................................. 249,368* 1,435 6.08% Pfd. .............................................................................. 147,374* 90,000 6.45% Pfd. .............................................................................. 2,322,900* 2,441 Entergy Gulf States, Inc., 7.56% Pfd. ...................................................... 240,756* 36,000 Entergy Louisiana, Inc., 6.95% Pfd. ........................................................ 3,769,920* Entergy Mississippi, Inc.: 4,616 4.36% Pfd. .............................................................................. 331,290* 5,000 4.92% Pfd. .............................................................................. 404,900* 4,400 Florida Power Company, 4.75% Pfd. .......................................................... 386,408* 68,500 FPC Capital I, 7.10% Pfd., Series A ........................................................ 1,693,238 8,900 Georgia Power, 6.125% Pfd. ................................................................. 229,798*
6 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ Great Plains Energy, Inc.: 1,625 4.20% Pfd. .............................................................................. $ 123,760* 2,000 4.35% Pfd. .............................................................................. 157,780* Hawaiian Electric Company, Inc.: 2,471 5.00% Pfd., Series D .................................................................... 43,629* 7,438 5.00% Pfd., Series E .................................................................... 131,327* 1,383 5.00% Pfd., Series I .................................................................... 24,419* 30,500 Indianapolis Power & Light Company, 5.65% Pfd. ............................................. 2,867,000* 340,000 Interstate Power & Light Company, 8.375% Pfd., Series B .................................... 10,281,600* 2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949 ..................................... 216,357* Ohio Power Company: 3,018 4.20% Pfd. .............................................................................. 236,340* 1,251 4.40% Pfd. .............................................................................. 102,620* Pacific Enterprises: 13,680 $4.36 Pfd. .............................................................................. 1,101,787* 24,985 $4.50 Pfd. .............................................................................. 2,076,753* Pacific Gas & Electric Co.: 7,600 4.50% Pfd., Series H .................................................................... 156,712* 41,500 5.00% Pfd., Series D .................................................................... 951,180* 83,000 5.00% Pfd., Series E .................................................................... 1,918,960* PacifiCorp: 5,672 $4.56 Pfd. .............................................................................. 470,549* 6,708 $4.72 Pfd. .............................................................................. 576,016* 1,250 PECO Energy Company, $4.30 Pfd., Series B .................................................. 99,888* $ 1,500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D .................................... 1,543,650 14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E ................................ 1,379,848* 70,210 San Diego Gas & Electric Company, $1.70 Pfd. ............................................... 1,840,822* South Carolina Electric & Gas Company: 13,974 5.125% Purchase Fund Pfd., Pvt. ......................................................... 718,683* 7,774 6.00% Purchase Fund Pfd., Pvt. .......................................................... 396,085* 11,300 Southern California Edison, 6.00% Pfd. ..................................................... 1,116,666* Southern Union Company: $ 700,000 7.20% 11/01/66 .......................................................................... 708,154 51,750 7.55% Pfd. .............................................................................. 1,321,695* $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 .................................................... 730,125 Union Electric Company: 5,700 4.56% Pfd. .............................................................................. 460,446* 10,156 $7.64 Pfd. .............................................................................. 1,043,021*
7 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) - ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ Virginia Electric & Power Company: 1,665 $4.04 Pfd. .............................................................................. $ 123,843* 2,470 $4.20 Pfd. .............................................................................. 191,005* 1,673 $4.80 Pfd. .............................................................................. 147,860* 3,878 $6.98 Pfd. .............................................................................. 394,950* 12,500 $7.05 Pfd. .............................................................................. 1,264,844* 58,100 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ......................................... 1,461,941 2,262 Washington Gas & Light Company, $4.25 Pfd. ................................................. 186,072* $ 1,700,000 Wisconsin Energy Corporation, 6.25%, 05/15/67 .............................................. 1,649,660 Xcel Energy, Inc.: 15,000 $4.08 Pfd., Series B .................................................................... 1,132,500* 20,040 $4.10 Pfd., Series C .................................................................... 1,520,435* 35,510 $4.11 Pfd., Series D .................................................................... 2,700,891* 17,750 $4.16 Pfd., Series E .................................................................... 1,366,395* 10,000 $4.56 Pfd., Series G .................................................................... 843,800* - ------------------------------------------------------------------------------------------------------------------------------ 65,862,735 --------------- ENERGY -- 5.8% - ------------------------------------------------------------------------------------------------------------------------------------ 8,000 Devon Energy Corporation, 6.49% Pfd., Series A ............................................. 818,750* $ 2,500,000 Enterprise Products Partners, 7.034%, 01/15/68 ............................................. 2,255,585 6,125 EOG Resources, Inc., 7.195% Pfd., Series B ................................................. 6,521,349* $ 1,200,000 KN Capital Trust III, 7.63% 04/15/28 ....................................................... 1,069,080 10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ................................................ 1,043,800*(1) - ------------------------------------------------------------------------------------------------------------------------------ 11,708,564 --------------- REAL ESTATE INVESTMENT TRUST (REIT) -- 3.4% - ------------------------------------------------------------------------------------------------------------------------------------ 12,600 BRE Properties, Inc., 6.75% Pfd., Series D ................................................. 286,650 1,000 Equity Residential Properties, 8.29% Pfd., Series K ........................................ 57,600 Public Storage, Inc.: 121,975 6.45% Pfd., Series F .................................................................... 2,729,191 97,700 6.625% Pfd., Series M ................................................................... 2,216,569 10,500 6.75% Pfd., Series E .................................................................... 243,469 5,500 6.75% Pfd., Series L .................................................................... 127,016 4,500 6.95% Pfd., Series H .................................................................... 107,297 40,100 7.25% Pfd., Series K .................................................................... 989,969 - ------------------------------------------------------------------------------------------------------------------------------ 6,757,761 ---------------
8 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- PREFERRED SECURITIES -- (CONTINUED) MISCELLANEOUS INDUSTRIES -- 2.1% - ------------------------------------------------------------------------------------------------------------------------------------ 13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B .................................. $ 1,076,848* 35,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................................ 3,178,000* - ------------------------------------------------------------------------------------------------------------------------------ 4,254,848 --------------- U.S. GOVERNMENT SECURITIES -- 0.4% - ------------------------------------------------------------------------------------------------------------------------------------ Freddie Mac: 9,500 5.00%, Series F ......................................................................... 407,075* 20,000 5.66%, Series W ......................................................................... 472,800* - ------------------------------------------------------------------------------------------------------------------------------ 879,875 --------------- TOTAL PREFERRED SECURITIES (Cost $188,161,522) ..................................................................... 187,757,348 --------------- CORPORATE DEBT SECURITIES -- 6.2% FINANCIAL SERVICES -- 0.8% - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,600,000 Lehman Brothers Holdings, 6.875% 07/17/37, Sub. Note ....................................... 1,507,702 - ------------------------------------------------------------------------------------------------------------------------------ 1,507,702 --------------- INSURANCE -- 2.5% - ------------------------------------------------------------------------------------------------------------------------------------ $ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ......................................... 875,880 $ 4,417,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................................ 4,231,928 - ------------------------------------------------------------------------------------------------------------------------------ 5,107,808 --------------- UTILITIES -- 1.0% - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,000,000 Duke Capital Corporation, 8.00% 10/01/19, Senior Notes ..................................... 1,123,007 10,000 Entergy Louisiana LLC, 7.60% 04/01/32 ...................................................... 251,250 30,500 PPL Capital Funding, Inc., 6.85% 07/01/47 .................................................. 730,475 - ------------------------------------------------------------------------------------------------------------------------------ 2,104,732 --------------- ENERGY -- 1.9% - ------------------------------------------------------------------------------------------------------------------------------------ $ 2,450,000 KN Energy, Inc., 7.45% 03/01/98 ............................................................ 2,123,449 71,900 Nexen, Inc., 7.35% Subordinated Notes ...................................................... 1,797,500(1) - ------------------------------------------------------------------------------------------------------------------------------ 3,920,949 --------------- TOTAL CORPORATE DEBT SECURITIES (Cost $12,898,640) ...................................................................... 12,641,191 ---------------
9 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2007 (UNAUDITED) - ------------------------------------------------------------------
SHARES/$ PAR VALUE - ------------- --------------- OPTION CONTRACTS -- 0.0% 470 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/20/07 $ 29,375+ 930 October Put Options on December U.S. Treasury Bond Futures, Expiring 09/21/07 18,750+ - ------------------------------------------------------------------------------------------------------------------------------ TOTAL OPTION CONTRACTS (Cost $174,307) ......................................................................... 48,125 --------------- MONEY MARKET FUND -- 0.2% 382,732 BlackRock Provident Institutional, TempFund ................................................ 382,732 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL MONEY MARKET FUND (Cost $382,732) ......................................................................... 382,732 --------------- SECURITIES LENDING COLLATERAL -- 0.7% 1,383,200 Institutional Money Market Trust ........................................................... 1,383,200 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL SECURITIES LENDING COLLATERAL (Cost $1,383,200) ....................................................................... 1,383,200 --------------- TOTAL INVESTMENTS (Cost $203,000,401***) ..................................................... 100.1% 202,212,596 OTHER ASSETS AND LIABILITIES (Net) ........................................................... (0.1)% (291,876) ------- --------------- TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ..................................... 100.0%++ $ 201,920,720 ------- --------------- MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ...................................... (70,000,000) --------------- TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................................. $ 131,920,720 ===============
- ----------------- * Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income. ** Securities distributing Qualified Dividend Income only. *** Aggregate cost of securities held. **** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. These securities have been determined to be liquid under the guidelines established by the Board of Directors. (1) Foreign Issuer. (2) Security on loan. + Non-income producing. ++ The percentage shown for each investment category is the total value of that category as a percentage of net assets available to Common and Preferred Stock. ABBREVIATIONS: PFD. -- Preferred Securities PVT. -- Private Placement Securities 10 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK (1) FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED) ------------------------------------------------------------------------- OPERATIONS: Net investment income ................................................................ $ 9,372,333 Net realized gain/(loss) on investments sold during the period ....................... (991,550) Change in net unrealized appreciation/depreciation of investments held during the period. ............................................................................ (15,040,896) Distributions to MMP(R)* Shareholders from net investment income, including changes in accumulated undeclared distributions ............................................ (2,390,637) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................. (9,050,750) DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders(2) ............ (6,888,954) ------------- TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ..................................... (6,888,954) FUND SHARE TRANSACTIONS: Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ... 503,098 ------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ............................................................ 503,098 NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ------------- FOR THE PERIOD ....................................................................... $ (15,436,606) ============= - ------------------------------------------------------------------------------------------------------------ NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period .................................................................. $ 147,357,326 Net decrease in net assets during the period ......................................... (15,436,606) ------------- End of period ........................................................................ $ 131,920,720 =============
- ----------------- * Money Market Cumulative Preferred(TM) StocK. (1) These tables summarize the nine months ended August 31, 2007 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2006. (2) May include income earned, but not paid out, in prior fiscal year. 11 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED) FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD. - ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ................................................. $ 12.60 ------------- INVESTMENT OPERATIONS: Net investment income ................................................................ 0.80 Net realized and unrealized gain/(loss) on investments ............................... (1.37) DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS: From net investment income ........................................................... (0.20) From net realized capital gains ...................................................... -- ------------- Total from investment operations ..................................................... (0.77) ------------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income ........................................................... (0.59) From net realized capital gains ...................................................... -- ------------- Total distributions to Common Stock Shareholders ..................................... (0.59) ------------- Net asset value, end of period ....................................................... $ 11.24 ============= Market value, end of period .......................................................... $ 11.00 ============= Common Stock shares outstanding, end of period ....................................... 11,736,346 ============= RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income+ ............................................................... 6.54%** Operating expenses ................................................................... 1.57%** - ---------------------------------- SUPPLEMENTAL DATA:++ Portfolio turnover rate .............................................................. 51%*** Total net assets available to Common and Preferred Stock, end of period (in 000's). ........................................................................ $ 201,921 Ratio of operating expenses to total average net assets available to Common and Preferred Stock ......................................................... 1.05%**
(1) These tables summarize the nine months ended August 31, 2007 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2006. * Money Market Cumulative Preferred (TM) Stock. ** Annualized. *** Not Annualized + The net investment income ratios reflect income net of operating expenses and payments to MMP(R)* Shareholders. ++ Information presented under heading Supplemental Data includes MMP(R)*. 12 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) PER SHARE OF COMMON STOCK (UNAUDITED) ------------------------------------- TOTAL DIVIDEND DIVIDENDS NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) --------- --------- ------------- ------------ December 31, 2006 ........... $0.0650 $12.39 $12.36 $12.39 January 31, 2007 ............ 0.0650 12.42 12.39 12.42 February 28, 2007 ........... 0.0650 12.60 12.61 12.60 March 31, 2007 .............. 0.0650 12.32 12.66 12.32 April 30, 2007 .............. 0.0650 12.33 12.62 12.33 May 31, 2007 ................ 0.0650 12.10 12.13 12.10 June 30, 2007 ............... 0.0650 11.97 12.00 11.97 July 31, 2007 ............... 0.0650 11.55 11.46 11.39 August 31, 2007 ............. 0.0680 11.24 11.00 11.04 - ----------------- (1) Whenever the net asset value per share of the Fund's Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market. 13 - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - ----------------------------------------- 1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES At August 31, 2007, the aggregate cost of securities for federal income tax purposes was $203,135,259, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $8,564,450, and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $9,487,113. 14 [This page intentionally left blank] DIRECTORS Donald F. Crumrine, CFA Chairman of the Board David Gale Morgan Gust Karen H. Hogan Robert F. Wulf, CFA OFFICERS Donald F. Crumrine, CFA Chief Executive Officer Robert M. Ettinger, CFA President R. Eric Chadwick, CFA Chief Financial Officer, Vice President and Treasurer Chad C. Conwell Chief Compliance Officer, Vice President and Secretary Bradford S. Stone Vice President and Assistant Treasurer Laurie C. Lodolo Assistant Compliance Officer, Assistant Treasurer and Assistant Secretary INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@pfdincome.com QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND? o If your shares are held in a Brokerage Account, contact your Broker. o If you have physical possession of your shares in certificate form, contact the Fund's Transfer Agent & Shareholder Servicing Agent -- PFPC Inc. P.O. Box 43027 Providence, RI 02940-3027 1-800-331-1710 THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT. Flaherty & Crumrine [LOGO] =================== PREFERRED INCOME OPPORTUNITY FUND Quarterly Report August 31, 2007 www.preferredincome.com -----END PRIVACY-ENHANCED MESSAGE-----